Abstract

Small-scale entrepreneurs typically cite access to finance as the most important constraint to growth. Recent randomized experiments have shown the return to capital to be very high for the average microenterprise in Sri Lanka. An intervention was designed to improve access to credit among these high-return microenterprises without subsidizing interest rates or requiring group lending. The intervention consisted of information sessions providing details of the microfinance loan product offered by a regional development bank and a reduction from two to one in the number of personal guarantors required for these loans. Ten percent of the microenterprises invited to the information meetings received a new loan, doubling the proportion of firms receiving loans over this period. However, the loans do not appear to be going to particularly high-return firms but rather to firms with more household assets. Many more firms would like loans but are constrained by an inability to find personal guarantors and by other bureaucratic procedures. The results suggest that information alone is unlikely to be enough for most firms and point to the need for credit bureaus that cover microfinance loans and for continuing innovation in loan products that can reach the urban microenterprise sector.